Asset Allocation Strategy workbook Issue Number 13 June 2014 Prepared for Adviser Name
The purpose of this workbook Your financial adviser will use this workbook to help you determine an asset allocation that best meets your needs, taking into account the returns you want and the risks you are prepared to take to achieve those returns. What is asset allocation? Asset allocation is the name given to the mix of asset classes you choose to build your portfolio. The common asset classes are cash, fixed interest, property, shares and alternatives. Your asset allocation is one of the most important factors in determining the returns and risk in your portfolio. Selecting a suitable mix will play a crucial role in ensuring your portfolio achieves your objectives within your comfort zone. Your asset allocation is the first step towards developing your personalised investment portfolio. What is a risk profile? This workbook uses six risk profiles, each of which has different return and risk characteristics. A risk profile contains the mix of the specified asset classes that BT Financial Group s Research team currently believe is most likely to achieve its target return over its minimum timeframe with the lowest risk (given the target return objective). These risk profiles are determined by reference to historical risk and return data, economic forecasts and forecast risk and return information (see `Important information on page 11 for more detail). It may be that there is no one particular risk profile that is appropriate for you and so with the assistance of your financial adviser, you may need to vary your asset allocations to suit your personal circumstances. What happens after I ve chosen a risk profile? The risk profiles presented in this workbook are a starting point. Once you have determined your preferred portfolio, your financial adviser will select your actual investments to develop a portfolio that is aligned to your needs and objectives and explain how this is appropriate to your needs and circumstances. This will also be recorded in an advice document, generally known as a Statement of Advice. 2 Asset Allocation Strategy workbook
Stage One: Making a preliminary view of your preferred portfolio Consider the following Below are five key considerations when choosing a suitable asset allocation strategy: 1. Understand what risks you are prepared to take in regard to investing. 2. Ensure your investment timeframe is consistent with the minimum timeframe of your preferred asset allocation. 3. Ensure your preferred asset allocation is likely to achieve the return required to satisfy your objectives. 4. Ensure you are comfortable with the risk associated with your preferred asset allocation. 5. Ensure your financial situation can support your decision. 1. Investing involves risk Any investment decision you make involves taking a level of risk. When planning for your future financial needs you must firstly reflect and understand what risks you are prepared to accept in order to achieve your objectives. Specifically, your preparedness to accept loss of capital or lack of income will help determine whether your objectives can be met relative to your tolerance to accept risks. 2. Your investment timeframe is crucial History has shown that assets such as shares and property generally provide higher returns over long time periods (10 years or more). If you are able to leave your funds invested for 10 years it may make sense to invest in a portfolio that has a greater proportion in these assets. The downside of these assets is that they have considerable volatility in the short term. Although they may rise significantly in any one year, they may also fall significantly. Over the long term this volatility usually smooths out. However, this same volatility makes assets such as shares and property unsuitable for most investors with short investment time-frames. 3. The importance of returns Many people have specific goals (eg renovating their home, becoming debt-free or providing for retirement). In most cases, success in reaching your objectives will be largely dependent on returns. You will therefore require your investments to deliver sufficient returns to achieve your goals. While investment returns are critical, it is crucial that you understand and are comfortable with the risk you undertake in order to achieve that return. 4. What is risk and risk tolerance? The most commonly understood meaning of risk is the probability of losing money. However, there are actually three key areas of risk you need to be aware of: a. The value of your investment might decrease and you may lose your capital (ie finish with less than you started). b. The investment does not provide the income or growth you re expecting, so you don t meet your investment goals. c. increases at a higher rate than the performance of your investments ie the real value of your investments decreases. 5. Your financial situation You should also consider your personal financial circumstances. You need to make sure that you have enough money put aside to cover any emergency expenses. You should also consider whether your current situation is likely to remain consistent over your investment timeframe. For example, do you expect to have the same level of income for the entirety of your investment timeframe? Choosing your preferred portfolio It may be that you have different timeframes, return objectives or risk tolerance for different investments. For example, your retirement may be 20 years away so the asset allocation you choose for your super may be different to the asset allocation you choose for a savings plan to buy the boat you want to buy in five years. Therefore you can treat each goal separately so that you have the correct asset allocation for each goal. In the table below, please complete the details for each of your financial goals. Your goals and objectives Timeframe (in years) Amount Required (todays dollars) (1) $ (2) $ (3) $ (4) $ Client 1, Client 2 or Joint Asset Allocation Strategy workbook 3
How to read the Asset Allocation Strategy Worksheet Step 1: Determine your investment timeframe Choose a portfolio with a recommended timeframe that is consistent with your investment timeframe Each risk profile has a recommended minimum amount of time you should hold your investment in order to achieve the portfolio s objectives. For example, you can see in the table on page 5 that a Balanced investor should invest for a minimum of five to seven years. Time reduces risk You can see from the table on page 5 that the probable range of average returns for a Balanced investor over five years of investing is 0.2% to 15.2%. (This range may generally be higher in the short-term, however any years good or bad are generally balanced out by other years). If you intend to sell your investments before the suggested minimum investment timeframe, your risk of losing money is much higher than if you intend to hold them for the whole timeframe. The higher the volatility, the greater the potential returns The table on page 5 shows that an investor with a Defensive portfolio, while relatively stable, has a forecast average value of $170,814 after ten years, whereas a High Growth investor s portfolio, which is very volatile, has a forecast average value of $247,823 over the same period. Step 2: Determine which portfolio meets your required returns Consider which portfolio has a similar objective to yours Each asset allocation has been developed with a return objective in mind. For example, the Balanced portfolio seeks a return of 5.0% over inflation. If the average inflation (CPI) over 10 years is 2.5%, then the balanced portfolio aims to achieve an average return of 7.5% over those 10 years. Consider the long term impact of different returns to your portfolio If you look at the long-term forecast return (over ten years) for each of the asset allocations you will notice that they range from 3.75% to 9.5%. The impact of this difference over ten years for a $100,000 portfolio is significant. Average portfolio values projected over ten years range from $144,504 to $247,823. Step 3: Consider how much risk you can live with can you sleep at night with this portfolio? Risk of negative returns The probability of a negative return in any particular year highlights the probability of your portfolio going backwards in any one year. A Balanced investor could expect that their portfolio will experience a negative return once every six years. Volatility Based on the calculations on page 5, over any rolling 5 year period of investing, an investor with a Balanced portfolio could experience a return anywhere between 0.2% to 15.2%, with the worst historical return for the portfolio in any single year -26.2%. This means that you need to accept that if you start with $100,000, it is possible that you could have $73,800 at the end of the first year based on the historical worst case scenario. Step 4: Ensure your financial situation can support your asset allocation strategy decision You need to ensure that you can leave your portfolio for the required timeframe, and that you have other money available for emergencies. 4 Asset Allocation Strategy workbook
Note: All information presented should be read with reference to the Important information on page 11. Benchmark portfolios Cash Defensive Moderate Balanced Growth High Growth Suggested minimum Investment Timeframe 1 Any 3-5 years 3-5 years 5-7 years 7-10 years 10 years+ Asset allocation (%) Australian cash 100.0 25.0 12.0 5.0 3.0 3.0 Diversified fixed interest 2 0.0 42.0 36.0 24.0 12.0 7.5 Australian shares 0.0 13.5 23.5 31.0 37.0 38.5 International shares 0.0 6.5 13.5 23.0 30.0 31.0 Property and Infrastructure 0.0 8.0 8.0 8.0 8.0 10.0 Alternatives 4 0.0 5.0 7.0 9.0 10.0 10.0 Portfolio Total 100.0 100.0 100.0 100.0 100.0 100.0 Returns Targeted long term portfolio objective N/A +3.0% +4.0% +5.0% +5.5% +6.0% Expected Forecast return (10 years) (% pa) ~ 3.75 5.5 6.5 8.0 8.5 9.5 Expected Forecast volatility (10 years) (% pa) ~ 0.5 4.5 6.5 9.0 10.5 11.5 Value of $100,000 invested for 10 years 3 $800,000 Note: The darker the shading, the more likely the returns are $700,000 $672,750 $600,000 $569,468 $500,000 $480,683 $400,000 $339,457 $300,000 $200,000 $100,000 $0 $259,374 $151,621 $170,814 $144,504 $137,689 $110,462 $187,714 $100,000 $215,892 $226,098 $90,468 $81,707 $247,823 $81,707 Historical Analysis Range of 5yr rolling forecast range (% pa): 4.2 to 6.3% 3.8 to 9.8% 2.2 to 12.6% 0.2 to 15.2% -1.6 to 17.2% -1.7 to 18.5% Returns Worst case historical scenario 5 3.0% -9.6% -17.9% -26.2% -32.0% -35.0% (pa). Date of worst case historical scenario 5 Sep 13 Nov 08 Nov 08 Nov 08 Nov 08 Nov 08 Best case historical scenario 5 7.8% 16.7% 23.3% 29.3% 34.1% 38.0% Date of best case historical scenario 5 Oct 08 Feb 10 Feb 10 Feb 10 Feb 10 Feb 10 Expected long-term frequency of negative return (estimated 1 in x years)* 0 11.0 7.5 6.0 5.5 5.0 1 Minimum investment timeframe refers to the minimum period of time an investor should be prepared to remain within a given benchmark portfolio in order to recoup any past capital losses that could have been incurred from the initial investment, obviously taking into account the entry point and time needed to achieve the portfolio return objective and a normal business cycle. 2 Diversified fixed interest includes investments such as Australian Fixed Interest, International Fixed Interest, Investment and non-investment grade credit and high yield debt. 3 The values of $100,000 invested for 10 years area based on an exponential calculation using the long-term forecast return and the forecast standard deviation of the portfolio which is adjusted for a confidence interval using a student s t distribution. 4 Alternative investments include but are not limited to investments such as Hedge Funds, Fund of Fund Hedge Funds, Private Equity, Direct Infrastructure, Derivative based funds, Currency and Commodity Funds. 5 The best and worst case historical scenario illustrates the best capital increase and worst capital loss respectively that would have been experienced over a rolling 12 month period. These figures have been calculated by applying the asset allocations of the benchmark portfolio against the asset class benchmark returns. This analysis has been carried out with the first 12 month rolling return commencing January 2001. * Frequency of negative return does not mean you can not experience multiple years of negative returns. It reflects a distribution of expected return outcomes relative to the expected risk of the strategy. ~ The returns and volatility for each benchmark portfolio are reviewed annually as part of the strategic review of each of the underlying asset classes. Information based upon market data at September 2013. Asset Allocation Strategy workbook 5
Stage Two: The Comfort Test The comfort test will help your financial adviser confirm your understanding of the risk aspects of your preferred portfolio(s). It allows you to compare the characteristics of each of the different portfolios and confirm your tolerance to risk against them. If you are investing with a partner, you will both need to complete the questions separately (providing responses on pages 7 and 8 respectively). You can then determine which asset allocation will be applied to joint investments (if any). Only complete the comfort test for your preferred portfolio with the longest timeframe. Put a tick against your preferred portfolio at the top of the Asset allocation strategy worksheet on page 7. Where completing the Comfort test with your partner, your partner should select their preferred portfolio at the top of the asset allocation worksheet on page 8. You are now ready to complete the comfort test. Please note your answers to the questions below on the Asset allocation strategy worksheet at the bottom of page 7. Where completing the comfort test with your partner, your partner should note their answers on the worksheet at the bottom of page 8. (1) It is widely accepted that the higher the risk that you are willing to accept, the higher the return you could expect. With this in mind, what level of fluctuations in the value of your money would you be willing to accept to achieve your goals? a) No fluctuations in capital would be acceptable b) Low to medium fluctuations in my capital value over the short-term c) Medium fluctuations in my capital value in short-term d) Medium to high fluctuations in my capital value in the short to medium term e) High fluctuations in my capital value in the short to medium term f) Very high fluctuations in my capital value in the short to medium term (2) What potential annual ranges of return are you comfortable with to achieve your investment goals? (3) What is the maximum amount of your portfolio value, in percentage terms, that you would be willing to lose in any 12 month period? Percentage decrease Value of $100,000 a) 0% $100,000 b) 10% $90,000 c) 18% $82,000 d) 26% $74,000 e) 32% $68,000 f) 35% $65,000 (4) Based on your investment goals and tolerance to risk, what is your tolerance of a negative return in any one year? a) No tolerance b) 1 year in 11 c) 1 year in 7.5 d) 1 year in 6 e) 1 year in 5.5 f) 1 year in 5 You may feel that the responses to these questions are now not entirely consistent with your preferred asset allocation. Likewise it s not uncommon for your answers to these four questions to lead to more than one asset allocation. This is a natural part of the process and highlights the trade-offs that you need to make when selecting an asset allocation. Do you go with higher returns and accept the higher risk or do you reduce your risk and live with lower returns? There is no right or wrong answer in relation to the risk you are willing to accept. The key is that you need to feel comfortable sticking with the risk of the asset allocation for the minimum investment timeframe. Your financial adviser can only assist you to make an informed decision. You can now work with your financial adviser to select the asset allocation you wish to consider when developing your investment recommendations. a) 3.0% to 7.8% b) -9.6% to 16.7% c) -17.9% to 23.3% d) -26.2% to 29.3% e) -32.0% to 34.1% f) -35.0% to 38.0% 6 Asset Allocation Strategy workbook
Client 1 Asset allocation strategy worksheet Note: All information presented should be read with reference to the Important information on page 11. Benchmark portfolios Cash Defensive Moderate Balanced Growth High Growth Suggested minimum Investment Timeframe 1 Any 3-5 years 3-5 years 5-7 years 7-10 years 10 years+ Asset allocation (%) Australian cash 100.0 25.0 12.0 5.0 3.0 3.0 Diversified fixed interest 2 0.0 42.0 36.0 24.0 12.0 7.5 Australian shares 0.0 13.5 23.5 31.0 37.0 38.5 International shares 0.0 6.5 13.5 23.0 30.0 31.0 Property and Infrastructure 0.0 8.0 8.0 8.0 8.0 10.0 Alternatives 4 0.0 5.0 7.0 9.0 10.0 10.0 Portfolio Total 100.0 100.0 100.0 100.0 100.0 100.0 Returns Targeted long term portfolio objective N/A +3.0% +4.0% +5.0% +5.5% +6.0% Expected Forecast return (10 years) (% pa) ~ 3.75 5.5 6.5 8.0 8.5 9.5 Expected Forecast volatility (10 years) (% pa) ~ 0.5 4.5 6.5 9.0 10.5 11.5 Value of $100,000 invested $800,000 for 10 years 3 Note: The darker the shading, the more likely the returns are $700,000 $672,750 $600,000 $500,000 $480,683 $569,468 $400,000 $339,457 $300,000 $259,374 $247,823 $215,892 $226,098 $200,000 $151,621 $170,814 $187,714 $144,504 $100,000 $137,689 $110,462 $100,000 $90,438 $81,707 $81,707 $0 Historical Analysis Range of 5yr rolling forecast range (% pa): 4.2 to 6.3% 3.8 to 9.8% 2.2 to 12.6% 0.2 to 15.2% -1.6 to 17.2% -1.7 to 18.5% Returns Worst case historical scenario 5 3.0% -9.6% -17.9% -26.2% -32.0% -35.0% (pa). Date of worst case historical scenario 5 Sept 13 Nov 08 Nov 08 Nov 08 Nov 08 Nov 08 Best case historical scenario 5 7.8% 16.7% 23.3% 29.3% 34.1% 38.0% Date of best case historical scenario 5 Oct 08 Feb 10 Feb 10 Feb 10 Feb 10 Feb 10 Expected long-term frequency of negative return (estimated 1 in x years)* 0 11.0 7.5 6.0 5.5 5.0 Comfort test answers a b c d e f 1) Capital volatility None Low/Med Medium Med/High High Very High 2) Potential ranges 3.0% to 7.8% -9.6% to 16.7% -17.9% to 23.3% -26.2% to 29.3% -32.0% to 34.1% -35.0% to 38.0% 3) Fall in value^ 4) Negative return tolerance^ 0% -10% -18% -26% -32% -35% Nil 1 year in 11 1 year in 7.5 1 year in 6 1 year in 5.5 1 year in 5 1 Minimum investment timeframe refers to the minimum period of time an investor should be prepared to remain within a given benchmark portfolio in order to recoup any past capital losses that could have been incurred from the initial investment, obviously taking into account the entry point and time needed to achieve the portfolio return objective and a normal business cycle. 2 Diversified fixed interest includes investments such as Australian Fixed Interest, International Fixed Interest, Investment and non-investment grade credit and high yield debt. 3 The values of $100,000 invested for 10 years area based on an exponential calculation using the long-term forecast return and the forecast standard deviation of the portfolio which is adjusted for a confidence interval using a student s t distribution. 4 Alternative investments include but are not limited to investments such as Hedge Funds, Fund of Fund Hedge Funds, Private Equity, Direct Infrastructure, Derivative based funds, Currency and Commodity Funds. 5 The best and worst case historical scenario illustrates the best capital increase and worst capital loss respectively that would have been experienced over a rolling 12 month period. These figures have been calculated by applying the asset allocations of the benchmark portfolio against the asset class benchmark returns. This analysis has been carried out with the first 12 month rolling return commencing January 2001. * Frequency of negative return does not mean you can not experience multiple years of negative returns. It reflects a distribution of expected return outcomes relative to the expected risk of the strategy. ~ The returns and volatility for each benchmark portfolio are reviewed annually as part of the strategic review of each of the underlying asset classes. Information based upon market data at September 2013. ^ For the purposes of undertaking the Fall in value and Negative return tolerances, the numbers used have been rounded from the data in the above table. Asset Allocation Strategy workbook 7
Client 2 Asset allocation strategy worksheet Note: All information presented should be read with reference to the Important information on page 11. Benchmark portfolios Cash Defensive Moderate Balanced Growth High Growth Suggested minimum Investment Timeframe 1 Any 3-5 years 3-5 years 5-7 years 7-10 years 10 years+ Asset allocation (%) Australian cash 100.0 25.0 12.0 5.0 3.0 3.0 Diversified fixed interest 2 0.0 42.0 36.0 24.0 12.0 7.5 Australian shares 0.0 13.5 23.5 31.0 37.0 38.5 International shares 0.0 6.5 13.5 23.0 30.0 31.0 Property and Infrastructure 0.0 8.0 8.0 8.0 8.0 10.0 Alternatives 4 0.0 5.0 7.0 9.0 10.0 10.0 Portfolio Total 100.0 100.0 100.0 100.0 100.0 100.0 Returns Targeted long term portfolio objective N/A +3.0% +4.0% +5.0% +5.5% +6.0% Expected Forecast return (10 years) (% pa) ~ 3.75 5.5 6.5 8.0 8.5 9.5 Expected Forecast volatility (10 years) (% pa) ~ 0.5 4.5 6.5 9.0 10.5 11.5 Value of $100,000 $800,000 invested for 10 years 3 Note: The darker the shading, the more likely the returns are $700,000 $672,750 $600,000 $500,000 $480,683 $569,468 $400,000 $339,457 $300,000 $259,374 $247,823 $215,892 $226,098 $200,000 $151,621 $170,814 $187,714 $144,504 $100,000 $137,689 $110,462 $100,000 $90,438 $81,707 $81,707 $0 Historical Analysis Range of 5yr rolling forecast range (% pa): 4.2 to 6.3% 3.8 to 9.8% 2.2 to 12.6% 0.2 to 15.2% -1.6 to 17.2% -1.7 to 18.5% Returns Worst case historical scenario 5 3.0% -9.6% -17.9% -26.2% -32.0% -35.0% (pa). Date of worst case historical scenario 5 Sep 13 Nov 08 Nov 08 Nov 08 Nov 08 Nov 08 Best case historical scenario 5 7.8% 16.7% 23.3% 29.3% 34.1% 38.0% Date of best case historical scenario 5 Oct 08 Feb 10 Feb 10 Feb 10 Feb 10 Feb 10 Expected long-term frequency of negative return (estimated 1 in x years)* 0 11.0 7.5 6.0 5.5 5.0 Comfort test answers a b c d e f 1) Capital volatility None Low/Med Medium Med/High High Very High 2) Potential ranges 3.0% to 7.8% -9.6% to 16.7% -17.9% to 23.3% -26.2% to 29.3% -32.0% to 34.1% -35.0% to 38.0% 3) Fall in value^ 4) Negative return tolerance^ 0% -10% -18% -26% -32% -35% Nil 1 year in 11 1 year in 7.5 1 year in 6 1 year in 5.5 1 year in 5 1 Minimum investment timeframe refers to the minimum period of time an investor should be prepared to remain within a given benchmark portfolio in order to recoup any past capital losses that could have been incurred from the initial investment, obviously taking into account the entry point and time needed to achieve the portfolio return objective and a normal business cycle. 2 Diversified fixed interest includes investments such as Australian Fixed Interest, International Fixed Interest, Investment and non-investment grade credit and high yield debt. 3 The values of $100,000 invested for 10 years area based on an exponential calculation using the long-term forecast return and the forecast standard deviation of the portfolio which is adjusted for a confidence interval using a student s t distribution. 4 Alternative investments include but are not limited to investments such as Hedge Funds, Fund of Fund Hedge Funds, Private Equity, Direct Infrastructure, Derivative based funds, Currency and Commodity Funds. 5 The best and worst case historical scenario illustrates the best capital increase and worst capital loss respectively that would have been experienced over a rolling 12 month period. These figures have been calculated by applying the asset allocations of the benchmark portfolio against the asset class benchmark returns. This analysis has been carried out with the first 12 month rolling return commencing January 2001. * Frequency of negative return does not mean you can not experience multiple years of negative returns. It reflects a distribution of expected return outcomes relative to the expected risk of the strategy. ~ The returns and volatility for each benchmark portfolio are reviewed annually as part of the strategic review of each of the underlying asset classes. Information based upon market data at September 2013. ^ For the purposes of undertaking the Fall in value and Negative return tolerances, the numbers used have been rounded from the data in the above table. 8 Asset Allocation Strategy workbook
Stage Three: My Preferred Asset Allocation 1. Please complete the table below with the goals and benchmark portfolios you would like your financial adviser to use when constructing your portfolio. Financial goals Benchmark portfolios (1) (2) (3) (4) OR Alternative asset allocation I would like to choose my own asset allocation Cash % Diversified Fixed Interest % Property and Infrastructure % Australian Shares % International Shares % Alternatives % 2. Did you find that any of your answers to the comfort test covered more than one asset allocation strategy? Yes No If Yes, please note your basis for choosing the above asset allocation: 3. Where you hold joint investments with your partner, based on the results of your individual Comfort Test results, which asset allocation would you like applied to these investments? Client 1 Client 2 Other If other, please specify: Asset Allocation Strategy workbook 9
Stage Four: Are my objectives achievable or is there a gap? By this stage you should feel comfortable with the level of risk in your selected portfolio(s), but the question remains, will it meet your investment objectives? Even though your financial adviser can explain how to maximise your current investments, you may still find that there is a gap between where you want to be and where your selected asset allocation will allow you to go. For example, you may have selected a Defensive portfolio but given the time you have to invest you may only be able to meet your objective by investing in a Growth portfolio. If any gaps are identified, you may need to reconsider your options and make the necessary trade-offs. Good planning is about helping you understand your options so you can select the ones that suit you best. 2. Conversely, if it is likely that you will clearly meet your needs and objectives, would you like to make any adjustments? Comments Spend more (save less) Decrease your income, retire earlier or work part time Decrease your investment risk Revise your goals Other Your financial adviser will conduct further analysis of any gaps as required. However, it is helpful in the planning stage for your financial adviser to understand any trade-offs you might consider. 1. If your goals are unlikely to be met, please indicate which options you would consider: Comments Save more (spend less) Downsize lifestyle assets Increase your income resources: work longer, part-time Preparedness to increase your investment risk Borrow to invest Revise your goals consistent with your risk tolerance None Other 10 Asset Allocation Strategy workbook
Important Information Do not act solely on this workbook The information in this workbook has been prepared as a guide only to help you choose an asset allocation for your investment and/or superannuation portfolio. Any investment decision you make should consider a number of issues as well as those considered through this workbook. You should consider the specific risks and other characteristics of a particular financial product before acquiring that product. Your financial adviser will now continue to work through the financial planning process with you to fully understand your objectives, financial situation and needs. You should not make any investment decisions until your financial adviser has considered your personal circumstances and you have been provided with, and have read the advice document provided (ie a Statement of Advice) and any relevant Product Disclosure Statements or other offer documents. Forecast return information The forecast information in this workbook has been prepared by the BT Financial Group Research team. Long-term forecast returns and risk for each asset class have been based on the analysis of historical and forecast market data, fundamental economic factors and historical co variances between the asset classes and are best estimates of asset class returns and risk. These forecast figures provide a guide as to the likely future behaviour of returns for asset allocations. The long-term forecast returns in no way provide any guarantee of future performance and are based on the strategic long-term view of each asset class as at the end of September 2013. The forecast average return for each asset allocation is based on the long-term forecast returns of each asset class within the asset allocation and the weight allocated to each asset class within the asset allocation. Currently this produces higher forecast returns than the minimum long-term asset allocation objectives. An inflation rate of 2.5% has been used for the Australian asset classes. The exposure to international asset classes required consideration of relevant economic factors for each country. Portfolios have been constructed on the basis that 25% of the International Shares allocation has been hedged and 75% has been unhedged. A confidence level is a statistical measure that illustrates the likelihood of an event taking place. In the case of this workbook, it looks at the likelihood of a return falling within the stated range and the likelihood of the value of an investment of $100,000 over 10 years falling within a stated range using a 95% confidence interval. 95% confidence means that for the value of $100,000 invested for 10 years, there is a 5% probability that the expected returns fall outside the stated range. This is described as 95% confidence. Forecast returns don t make provision for investment fees and taxation as this will depend on the investments you select and your personal financial circumstances. However, the domestic equity forecasts do incorporate grossed-up franking credits and assume 80% of the dividends accrue franking credits. What s happened in the past Historical market data from January 2001 to September 2013 has been used in preparing the asset allocation strategy worksheet. Historical market data demonstrates how each of the asset classes has performed in the past. From this we can gain insights into typical market trends, cycles and the relationships between different asset classes. These insights allow us to establish a starting point for the construction of the asset allocations. It s important to note that because no market cycles are ever the same, historical returns are not an accurate indicator of likely future returns. We therefore also need to consider the current economic outlook, as well as other market related factors in determining expected asset class returns. The economic outlook The economic environment and outlook provides a backdrop as to what to expect from investments in the future. Fundamental economic factors such as the expected rate of inflation and the expected earnings growth rate of companies and valuation ratios, combined with indicators as to the direction of the economy provide a basis for expected returns for each asset class. Whilst every effort has been taken to ensure that the assumptions on which the economic forecasts, outlooks and other forecast risks and returns are based are reasonable, they may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. Asset Allocation Strategy workbook 11
Client Declaration I/We can confirm that my/our financial adviser has helped me/us make an informed decision about my/our asset allocation by explaining and/or confirming my/our understanding of: investment risks, including volatility and the risk of capital loss the characteristics of each of the asset classes and the likely nature of risk and return the benefits of diversification the recommended minimum timeframes for different asset allocations My/Our financial adviser has done this by using: This Asset Allocation Strategy Workbook Other educational material (as specified below) Tick the following box where a gearing discussion has been held: I/We confirm that my adviser has discussed Gearing as a strategy with me/us, including but not limited to the long-term nature of this strategy, the increased impact of positive and negative returns due to borrowed funds, the risks involved in a gearing strategy and the importance of understanding options in relation to unwinding the strategy should my/our financial circumstances change or the strategy no longer be appropriate for us. I/We understand that the information in this workbook is subject to the Important Information on page 11. Notes 12 Asset Allocation Strategy workbook
Client Name Client Signature Date Client Name Client Signature Date Adviser Name Adviser Signature Date Asset Allocation Strategy workbook 13
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Contact Sterling Private Wealth for further information on (03)9975-7200 or visit www.sterlingprivatewealth.com.au Magnitude Group Pty Ltd ABN 54 086 266 202, Australian Financial Services Licence 221557. MC13838-0514ms